According to the Federal Bureau of Investigation (FBI), it focuses largely on larger “organized criminal groups that prey on banks and engage in patterns of activity that lead to large aggregate losses.” However, that doesn’t give borrowers a free pass if they decide to lie about their income or history when applying for a mortgage.
Mortgage fraud is a sub-category of financial institution fraud (FIF). It’s characterized by “some type of material misstatement, misrepresentation or omission.”
In short, a lie that influences a bank’s should-we-or-shouldn’t-we loan decision is mortgage fraud. In addition, the FBI and other entities charged with investigating mortgage fraud, particularly in the wake of the housing market collapse, broadened the definition to include frauds targeting distressed homeowners.
There are two subcategories of mortgage fraud – fraud for profit and fraud for housing:
Fraud for profit: These are often industry insiders who use their specialized knowledge to commit or facilitate the fraud. The FBI says that current investigations and widespread reporting indicate that a high percentage of mortgage fraud involves collusion by industry insiders, such as bank officers, appraisers, mortgage brokers, attorneys, loan originators and other real estate professionals. Fraud for profit aims not to secure housing, but rather to misuse the mortgage lending process to steal cash and equity from lenders or homeowners. The FBI prioritizes fraud for profit cases.
Fraud for housing: This type of fraud is typically represented by illegal actions taken by a borrower motivated to acquire or maintain ownership of a house. The borrower may, for example, misrepresent income and asset information on a loan application or entice an appraiser to manipulate a property’s appraised value.
The FBI operates Financial Crimes Task Forces within several field offices throughout the country. Comprised of federal, state and local regulatory and law enforcement agencies who work together on a daily basis, these task forces have been an effective way to merge valuable resources of participating agencies.
FBI’s list of most common mortgage fraud schemes
Foreclosure rescue schemes
The perpetrators identify homeowners in foreclosure or at risk of default and mislead them into believing they can save their homes by transferring the deed or putting the property in the name of an investor. The perpetrators sell the property to an investor or straw borrower, create equity using a fraudulent appraisal, and steal the seller’s proceeds or fees. The homeowners are sometimes told they can pay rent for at least a year and repurchase the property once their credit has been reestablished. However, the perpetrators fail to make the mortgage payments and the property usually goes into foreclosure.
Loan modification schemes
Similar to foreclosure rescue scams, these schemes involve perpetrators purporting to assist homeowners who are delinquent in their mortgage payments and are on the verge of losing their home by offering to renegotiate the terms of the homeowners’ loan with the lender. The scammers, however, demand large fees upfront and often negotiate unfavorable terms for the clients – or they often don’t negotiate at all. Most homeowners ultimately lose their homes.
Illegal property flipping
Property is purchased, falsely appraised at a higher value and then quickly sold. What makes property flipping illegal is fraudulent appraisal information or false information provided during the transactions. The schemes typically involve one or more of the following: fraudulent appraisals; falsified loan documentation; inflated buyer income; or kickbacks to buyers, investors, property/loan brokers, appraisers or title company employees.
Builder bailout/condo conversion
Builders with a high inventory of units and declining demand may employ bailout schemes to offset losses. In a builder-bailout scheme, these builders find buyers who obtain loans but then allow the properties to go into foreclosure.
In a condo conversion scheme, developers buy apartment complexes during a housing boom and convert them into condos; in a declining real estate market, developers often have excess inventory, so they recruit straw buyers with cash-back incentives and then inflate the value of the condos to obtain a larger sales price. In addition to failing to disclose the cash-back incentives to the lender, the straw buyers’ income and asset information are often inflated in order for them to qualify for properties that they otherwise would be unqualified to purchase.
An investor may use a straw buyer, false income documents and false credit reports to obtain a mortgage loan in the straw buyer’s name. Subsequent to closing, the straw buyer signs the property over to the investor in a quit claim deed, which relinquishes all rights to the property and provides no guaranty to title. The investor does not make any mortgage payments and rents the property until foreclosure takes place later.
The buyer of a property borrows the downpayment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the downpayment, when, in fact, it’s borrowed. The second mortgage may not be recorded to conceal its status from the primary lender.
Home equity conversion mortgage (HECM)
A HECM is a reverse mortgage loan product insured by the Federal Housing Administration to borrowers who are 62 years or older, own their own property (or have a small mortgage balance), occupy the property as their primary residence, and participate in HECM counseling. It provides homeowners access to equity in their homes, usually in a lump sum payment.
HECM scammers recruit seniors through local churches or investment seminars, and they advertise through television, radio, billboard and mailers. The scammers then obtain a reverse mortgage in the name of a willing homeowner and convert the equity into a lump sum rather than monthly payments. However, they then keep the cash and pay only a fee to the senior citizen – or they simply abscond with the money. Since the homeowner with an HECM doesn’t have to make mortgage payments anymore, the crime is often not discovered under he or she dies. As another part of the scheme, the home’s appraisal is vastly inflated and the lender realize its true value right away either.
Commercial real estate loans
Owners of distressed commercial real estate (or those acting on their behalf) obtain financing by manipulating the property’s appraised value. Bogus leases may be created to exaggerate the building’s profitability, thus inflating the value as determined using the ‘income method’ for property valuation. Fraudulent appraisals trick lenders into extending loans to the owner.
When cash flows are lower than stated, the borrower struggles to maintain the property and repairs are often neglected. By the time the commercial loans go into default, the lender is often left with dilapidated or difficult-to-rent property.
In addition, many of the methods of committing mortgage fraud found in residential real estate are also present in commercial loan fraud.
This is a nonexistent property loan with usually no collateral. Air loans involve brokers who invent borrowers and properties, establish accounts for payments, and maintain custodial accounts for escrows. They may establish an office with a bank of telephones, each one used as the fake employer, appraiser, credit agency, etc., to fraudulently deceive creditors who attempt to verify information on loan applications.
Source: Federal Bureau of Investigation (FBI)
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